Enforcement of UK's Financial Sanctions: Strict Liability and a Stronger Approach

OFSI:

• May now also publicize details of financial sanctions breaches, even where a monetary penalty has not been imposed. This includes publicizing the persons that committed the breach. The power applies only where there is found to be a breach and an important compliance lesson for industry. There will be an opportunity to make representations prior to publication.
• Has emphasized that it will continue to take a fair and proportionate approach to assessing breaches. To this end OFSI:
  • has a continued focus on reporting and emphasizes the importance of self-disclosure as a potential mitigating factor.
  • will continue to take into account efforts to prevent breaches when deciding on any enforcement action.

• Will still, it would seem, take into account genuine errors, where adequate monitoring is in place. This may include a risk assessment of exposure to financial sanctions, a written sanctions compliance policy, automated screening procedures, training programs, and dedicated personnel in this area.
• Has made it clear that it will work with industry in establishing market practice. This approach, combined with the dramatic expansion of new financial sanctions measures and increased standard of liability, indicates that the authorities will look favorably on companies proactively engaging and seeking to understand their responsibilities in this area.

The UK’s sanctions regime has been under heavy scrutiny this year following the Russian invasion of Ukraine. New legislation has made several significant changes aimed at enabling the government to tackle breaches of financial sanctions swiftly and effectively. There have been two key changes to the UK’s approach to financial sanctions in recent months:

• A much greater number of individuals and entities is now targeted by financial sanctions.
• The manner in which the UK approaches civil enforcement of financial sanctions has also changed.

Economic Crime (Transparency and Enforcement) Act 2022 (the Act)

The Economic Crime (Transparency and Enforcement) Act 2022, introduced by the UK government as part of its response to the Russian invasion of Ukraine, made a number of changes to the financial sanctions regime.¹

1. Prior to the commencement of the Act, for OFSI to be able to impose a civil monetary penalty on a person (which includes a natural person, legal person, body, or entity) that had breached financial sanctions laws, that person must have known or suspected it was acting in breach of those laws. The Act removes that requirement, and OFSI can now impose a fine on a person (again, still including corporate persons) who was unaware that its actions were a breach of sanctions laws: All that OFSI will have to prove is that the person in question did in fact commit that breach. The person’s intention is irrelevant. Obviously, this significantly lowers the evidential bar OFSI must meet.
2. The Act will permit the Treasury to publish notices in situations where the Treasury believes a person has breached sanctions law but a fine has not been levied. A notice may still have significant consequences for its subject: If the Treasury considers that a person has acted in breach of sanctions laws (even in the absence of a fine), this could still give rise to issues, for example, covenant breaches in that person’s contracts with third parties, exclusion from public contracts, and significant reputational damage.
3. Before the Treasury can impose a fine, the person in question must be informed of their right to have that decision reviewed by a minister. The Act removes the requirement that the Treasury review be personally conducted by the relevant minister; instead, officials can undertake that review on the minister’s behalf where it is considered appropriate. While this change does not affect the circumstances in which a fine can be imposed, it does remove a procedural bottleneck faced by the Treasury in imposing such a fine. The intention is no doubt to ensure that the Treasury can act more swiftly in dealing with breaches of sanctions laws.
4. The Act allows ministers to authorize the sharing of information by relevant bodies and departments with the Treasury. Improved information flow to the Treasury, and increased coordination between various government departments, ought to allow the Treasury to act more decisively and at an earlier stage in combatting breaches of sanctions law.

Compliance or enforcement — a change to the UK approach?

The approaches of authorities tasked with handling breaches of sanctions might be divided into two groups: those that focus on strengthening reporting and notification obligations (a compliance-based approach) and those that focus on action against companies and supply chains directly (an enforcement-based approach).

The UK government, specifically the Treasury, has traditionally taken a compliance-based approach to breaches of sanctions laws, focusing on informing industry on its obligations. The expanded powers contained within the Act give the Treasury the ability, should it be so inclined, to move toward an enforcement-based approach (as has been seen in the U.S.).

However, this will depend on a number of factors. The Treasury will require the appropriate resources — that is, not only funding but the right institutional knowledge and experience — but these resources will be wasted unless the Treasury has a mindset shift such that it perceives its role to be an enforcement role. Both the allocation of resources and mindset within the Treasury will be directed by political will: There is currently significant political will and consensus about the desirability of sanctions, which would need to be sustained for these changes to be significant.

What steps should companies take in response to these new measures?

The Act does not materially alter what has always been the position: that companies must have proper processes and procedures in place to identify and mitigate sanctions risk. What has changed is what may happen when companies’ processes and procedures fail.

As such, companies would be well advised to familiarize themselves with OFSI’s approach to voluntary disclosures and the mitigations offered in response to such self-reporting. It seems that such an approach may cause strict liability breaches to be viewed in a more favorable light.